NPR Take on the Administration's Attempt at Financial Reform

This morning on Weekend Edition there was an odd discussion about the proposed new agency supposedly designed to protect consumers. The Obama Administration contends that there needs to be a new federal office like the Consumer Product Safety Commission to protect consumers in financial transactions. It is arguable whether the CPSC has actually aided consumers. But for a moment assume that it has been a useful activity. (For me, that is a huge assumption.) The rationale for the financial equivalent of the CPSC is on even more shaky ground. Financial transactions require some reasonable levels of disclosure (transparency) - which are already mandated under existing law. The problem this agency would be trying to solve is that they can be complicated.

The NPR correspondent was obviously in the tank for this idea. She made the bizarre differentiation between the drive for "transparency" and "simplicity" and then went on to argue that the Administration's proposal would strive toward the latter. In her mind transparency is disclosure, simplicity is disclosure so simple that anyone can understand it. Unfortunately, the proposal works in the opposite direction of both. As the proposal has been explained it would set up a national agency but still allow individual states to add new regulatory burdens to financial instruments.

The intent of the bill is clearly to reduce risk. It could be argued that government has a function to encourage safe products (although again I am a skeptic about that). But the extension of the logic to financial instruments is absurd. Financial markets are global in nature. The new financial instruments that emerged, in part, because of governmental policies did have some role in destabilizing the housing market. The emergence of "teaser rates" and "zero down" mortgages did create issues for consumers. But like the junk bonds of the 1970s and 1980s they also created some consumer benefits that are likely to be lost in the creation of a new bureaucracy to oversee the operations of thousands of financial institutions.

Dick Durbin (D-ILL) a cosponsor of the measure characterized the proposal in the following manner "In America, we don't say 'buyer beware' when people are buying prescription drugs or when they're concerned about lead paint in toys." Evidently Senator Durbin believes that a governmental agency can remove risk from financial instruments. Charles Schumer seems to have caught the moment when he argued "Disclosure is no longer enough," said Schumer. "Just as you wouldn't just have disclosure on drugs, you can't simply have disclosure on financial products. Consumers have been trapped in a business model that's designed to induce mistakes and jack up fees." Congressman Bill Delahunt (D-MASS) has argued that this proposal is "fundamentally a game changer." Truer words have never been spoken.